Catastrophic Condo Failure Is Not Caveat Emptor – Buyer Beware

The Bellavera Green Condo, Leduc Alberta, has suffered a massive, catastrophic, failure requiring all 150 of the residents (85 units) to vacate the premises. The reasons: code-failing fire alarm system, missing or damaged firewalls, condemned exterior staircase, non-sustained heat and electric, a second phase abandoned – unsafe and unsecured, and inability for emergency vehicles to access the building.

It is unclear who has title to the units (it’s not clear if the developer handed over title to occupied units), who to go after for costs, and the developer – Kevyn Frederick – has conveniently disappeared. As with catastrophic failures of this type, residents who have mortgages will remain responsible for their payments even if they can never return to their units, or have other costs until such time they could reside again at the Bellavera Green.

In all, 150 people (and those that rely upon them) have suffered grievous fiscal harm due to the mismanagement and greed of yet another developer. And I lay the blame clearly and solely at the foot of the developer and none others. Developers have full and final control over the building and plans. It is their choice to follow legislation, or to cut corners and ignore building codes. The rest of the infrastructure – including building inspectors – is just there to try to catch errors. But these errors are not there because they haven’t been caught; they are there at the failure of the developer. Trying to pass responsibility off on inspectors is a lot like saying “you didn’t catch me, so I’m innocent.”

That’s why fools who imply that the Bellavera Green owners who put down money and purchased mortgages have a responsibility to the failure of the condominium because of “Caveat Emptor” – or “if you were stupid enough to buy into this building then too bad for you” are pathetic and dim-witted.

The whole issue of Caveat Emptor, for a situation like this, was thrown out with Supreme Court of Canada judgement of Winnipeg Condominium Corporation No. 36 v. Bird Construction Co [1995] 1 S.V.R. 85, January 26 1995 (further discussion here):

First, it is reasonably foreseeable to contractors that, if they design or construct a building negligently and if that building contains latent defects as a result of that negligence, [purchasers] of the building may suffer personal injury or damage to other property when those defects manifest themselves.

In this case, the act of negligence: that it fails to meet code, and there is a real and true concern over devastating fire; so that personal injury or damage: the effects of such fire, that –

The reasonable likelihood that a defect in a building will cause injury to its inhabitants is also sufficient to ground a contractor’s duty in tort to subsequent purchasers of the building for the cost of repairing the defect if that defect is discovered prior to any injury and if it poses a real and substantial danger to the inhabitants of the building.

And the ruling seems to support my thought that the sole responsibility for catastrophic failures like this lay solely in the hands of the developer:

Apart from the logical force of holding contractors liable for the cost of repair of dangerous defects, a strong underlying policy justification also exists for imposing liability in these cases.  Maintaining a bar against recoverability for the cost of repair of dangerous defects provides no incentive for plaintiffs to mitigate potential losses and tends to encourage economically inefficient behaviour.  Allowing recovery against contractors in tort for the cost of repair of dangerous defects thus serves an important preventative function by encouraging socially responsible behaviour.

In the end, the owners are in for a long term amount of lost monies and (more importantly) time that will be required in moving forward with their lives. It’s a sad thing, and the province needs to put better protection in place to help stave off this type of abuse by developers in the future.

Florida Looks to Ban Condominium Raising Fees to Cover Delinquent Owner Shortfall

Senator Chris Smith for Fort Lauderdale has proposed a Florida senate bill that would make it illegal for condominium associations to cover delinquent owner payment by raising assessments on owners who pay their fees regularly.

To start with, it’s very important that a condominium raises the funds required to maintain the property, utilities, and safety of the building. That’s the primary purpose of the board, and performing proper maintenance and paying bills ensures that owners retain property that has (within the market) maximum resale value and opportunity.

When a large amount of delinquent owners exist in a condominium, the board fails to collect the revenue required to meet their duties to maintain the building and pay the bills. As corporations have limited powers to generate funds, they raise the contributions until the responsible, paying, owners meet the financial needs of the condominium corporation.

This can mean, where we see some condominium with 2/3 delinquency – that the responsible owners are paying 3x the condo contributions they should be. This is a great hardship.

Historically, this issue of non-payment hasn’t been an issue. But the combination of the housing crash, high unemployment levels, and most importantly – a foreclosure process in Florida that is now taking 12-24 months (gaaahhh!), is leaving a significant number of condominium raising fees on owners to cover costs.

Traditionally, non-payers would be foreclosed on, and the corporation would get the outstanding sums in 30 to 90 days from filing. That, with only a few delinquent at any one time was fiscally manageable. Now, with the lack of ability to collect in a timely manner, corporations are facing massive debts, shut off of services, and dangerous buildings.

At some point, even if it is two years, the corporation will get paid. The question is what to do in the meantime. If the Florida legislation moves forward – preventing responsible owners from paying for non-payers – the question still arises: where does the corporation get the money it needs now.

Corporations taking out loans works well in great economies because the corporation can back the loan with their ability to levy condo contributions. But when the debt issue arises from the very issue of being unable to collect contributions, there is no ability for a corporation to find money.

The legislation sounds all good and dandy to protect the responsible owners from directly paying more while the state courts take so long with the foreclosure, but that just puts the costs onto the building and services. Non-existent or reduced maintenance can have as great or greater cost on residents trying to resell as an increase in their condo contributions.

It’s a tough position, but the answer is not to limit the hands of the condominium corporation is sourcing the funds needed to maintain and operate the condominium corporation.

The real answer is for the Florida legislature to properly fund a court process that addresses the insane time it takes to foreclosure. Instead of responding to the substantial increase in foreclosures they have let the current system drown. It’s bad form to write more laws when the problem lies with the underfunded court system.

Canadian Law Would Allow Condo Owners to Fly Flag In Face Of By-Laws

Ahhh, another person who feels that patriotism requires legislative support to survive. In Canada, Conservative MP John Carmichael has tabled a private members bill that will “protect the rights of Canadians to fly their national flag where they live.”  Ghaaa – really? Is patriotism in such a short shift that it requires legislation to ensure condo owners can display a flag on their balcony or in their window? Nay I say. Nay.

I will always stand on guard for Canada. I’ll do that forever, even without the need of being reminded by flags from my neighbour’s condominiums.

Bats Protected From Condominium Evection

Now, just like there are senior’s condominiums, storage condominiums, and business condominiums – there are definitely bat condominiums. These are wood structures specifically designed with all the amenities that those cute little mammals could want. If I’m not mistaken, they come with no condominium or HOA fees as well!

What’s not necessarily expected is when bats take residence in the walls of condominiums designated for humans.  Indeed, if I found a bat hanging upside down from my bathroom door frame (which Miles Nures and Jennifer Plomt experienced), I would – with bylaws in hand – visit my condo board and have them remove those uninvited tenants too-sweet!

Now, many US states and Canadian provinces have grated bats protected status. This usually means that bats, once they have claimed a nest, cannot killed, exterminated, nor disturbed during the raising of newborns – usually from early summer through early fall.

That means, though unwanted as tenants, the Condominium cannot evict those winged bug eating stomachs (bats eat LOTS of bugs). They have the right to reside!

Now, the moment they leave, it is clearly the condominiums duty to repair and fill in all holes in the roof and siding so that their return can never, ever, happen again. Indeed, the fact that bats could reside in a condominium’s walls is a strong indication that the board is failing to perform their duties and maintain the common property correctly.

County Bans Smoking in All Multi-Unit Residences

Sonoma County, North California, banned all smoking in multi-unit residences. This includes not only common property (hallways, parkades, grounds, common rooms and laundries, and more) but private units as well.

It will be phased in over 16 months – with common areas falling under the smoking ban in 180 days, new units a bit later, and then already built private units on 12 January 2013.

I’m a committed non-smoker, but I still find this kind of blanket smoking ban on private residences heavy handed and intrusive. I’ve commented before (here and here) that this is something that should be done at the condominium or HOA level, but not at the municipal level. And even then I’ve been hesitant to support this at all.

It’s rhetorical and silly but I add “should they look at banning ethnic food or outdoor bbqs” – specifically where bbq smoke has been identified as carcinogenetic, and I’ve been well known to whip up a whole kick-ass cloud of that fatty black soot for my neighbours to inhale.

The ruling is good news for the 85% of non-smokers (according to Sonoma County), but I can not wonder if this action is too much an intrusion, and if exemptions can be granted for medial smoking (which is not indicated in the motion).

Recycling Facilities in New Condominiums Should Be Mandatory

As the president of a 40 year old 100 unit condominium complex I was completely stymied over the ineffectiveness of our recycling program.

Because of limitations on our trash compactor, along with the simple desire to offer recycling separation and pickup to over 250 residents, we converted one of the large rooms entering into the underground parkade into a separation station. We hoped to reduce our trash output (reduce the number of pickups) and become more environmentally responsible.

Unfortunately the location proved troublesome. It wasn’t attached to a trash room (each floor has a garbage shoot) which meant it was easier for owners to still dump recyclable material in the shoot. The room was very difficult for the recycling company to access – they needed access to the garage, and then building keys, along with extra room to maneuver their trailers in and out of a parkade. Without monitoring, the bins sitting right along a major owner though fare from the garage turned it into a dumping ground for garbage as well.

We pulled the program from the unit after six months.

As such, I’m all in favour of building regulations for new multi-unit residences, just like requiring things like dedicated visitor parking and handicap access, have a requirement to a recycling separation room (or rooms) that are easily accessed from a road, or otherwise build separation facilities into the functionality of the building. This should be mandated. Required. Legislated.

Sure – developers will scream that this will only add to the cost of the units they sell, but it likely will benefit the residence with lower trash removal costs and compliance with municipal recycling targets. Retrofitting recycling space is extremely difficult (or in our case impossible). It has to be included up front with all new buildings.

For those that don’t have recycling currently, many municipalities will offer free consulting and even materials (bins, notices, tenant communication) to get your condominium recycling.

Maryland Condominiums Have Right To Force Homeowners to Carry Insurance

I am humbled that there is a US state that has given the power to condominium boards to make carrying a homeowner insurance policy mandatory. For a country that often talks about the absolute right of the individual to make their own decisions (any anything, forbid, otherwise is some strange form of socialism, communism, or other ism), a collective has been given the power to require an owner to purchase specific insurance.

With condominiums, may people think that the insurance policy purchased by the condominium covers their units, when in fact this is normally not the case (there are exceptions).  Normally the insurance policy held by the condominium only covers damages and repairs to the common elements – the building envelope and grounds. It does not cover inside the owner’s unit.

For example, if you owned a unit in a condo that burnt down, and the condo is repaired, the corporation policy would rebuild the structure, but not the interior of your unit – the “betterments and improvements.” What’s a betterment or improvement – anything inside your unit. That would include the toilet (yup – the piping would come in, but the actual porcelain toilet is a betterment). It likely wouldn’t include your cabinets, your flooring, your paint, your sinks, and all sorts of stuff. You would have a shell, to fill as you would.

Additional insurance, bought properly, would cover those betterments and improvements (seriously, we don’t see the toilet as an improvement – we think it’s part of the unit, but it is). And because of the danger of fire or water or other loss, I always encourage people to buy the additional insurance.

It’s nice then, having been in the industry long enough to see several major losses, that Maryland will allow the boards to make this additional insurance required to be purchased by their owners. I’m not sure how they will enforce it (it seems a little toothless – what are you going to do, evict the owner?) – but it is good intention.

Some may wonder how few people actually pass on buying insurance – I have a great example. In Calgary, March of 2010, a massive condominium fire in the Millrise left hundreds homeless. Less than half, half, of the owners had additional insurance. That meant more than 100 people would have been left with just a shell of a unit when they were rebuilt, and would have had to pay the additional living expenses of shelter during the months and months to rebuild. Fortunately, the board had made a decision to carry the additional insurance for everyone – which allowed all the units to be rebuilt completely, and the homeless have their expenses covered during the rebuild.

Maryland’s insurance requirement is slightly different than what I described, as it’s a requirement to carry insurance against a deductible (of the common property insurance) for damages originating from their unit. But in general it is the same idea – forcing insurance and reducing the risk of catastrophic loss.

Real Estate Lawyer Recommends Removing Mortgage Protections to Stimulate Greed

It really shouldn’t surprise me that a lawyer who “represents developers, builders, lenders, corporate and institutional property owners and real estate brokers” advocates that the very protections put into place because of the poor actions of industry he represents should be repealed, so the industry can wallow in greed to which they would “start making money in housing, and lots of it.”

Just to be clear from his opinion, Seth G. Weissman says –

Rather than looking at investors as vultures or potential mortgage fraudsters, an attitudinal shift needs to occur where they are embraced as the potential saviors of the housing market that they are. Until investors start making money in housing, and lots of it, there will be no recovery in the housing market. This will only occur when disincentives to invest are eliminated. Like in any other market, when fear is replaced with greed, housing inventory will decline, prices will rise and a sense of urgency to buy will be restored to the market.

Very heady words there – including saviour. The premise argued seems to be that higher house prices should be the directed effort the industry and that would be a good thing.

But good isn’t about increasing housing values. It’s about generating fair market value of the actual product between buyer and seller. That’s not what we had during the recent boom.

Like any boom and bust cycle (all the way back to tulips), investors focused greed created immense inequity between the true value of a product and cost of the products.

Investors don’t value the idea of a fair market value of the property – they value the ability to flip a product as quickly as possible at a profit. The investor is bullish on taking a product in a boom cycle and encouraging the market to continue to increase well beyond the rate of inflation (artificially – by creating a sense of urgency, but not an actual urgency). On the flip, they also look to strip the product of any removable value converting it into their own wealth. Indeed, anything left on the table for the new purchaser is lost revenue for the investor.

The wreckage of the last boom cycle is still showing it’s scars upon the market and individuals (it really has been scant months). The damaging wake of a greedy industry is responsible for why so many properties still have mortgages greater than their value. The market hasn’t had time to correct. The burst hasn’t completed.

To call now for the removal of barriers preventing naked greed in the real estate industry, and to once again fleece the public, even before the bust completes, well, is pure greed. But what else should I expect.

With Great Responsibility Should Come Great Oversight

I’ve been reading about The FBI investigating corruption at the Home Owner Association level in the US, and about laws being proposed to help remedy the situation.

The investigation stems from the board using it’s authority to award contracts to which they have a conflict of interest. The argument outlined proposes that developers and lawyers have been purchasing a single condo in an association, then getting on the board to drive work to their (or associates).

It’s really not a terrible risk – the developer can buy a unit, and rent it (and later sell it) without the likelihood of any financial risk there, while generating millions in work (especially given the growth in building deficiencies).  It’s less of a risk because it’s very hard to find and stop conflict of interest.

Even without a plan to exploit the association or corporation, board members can pay themselves for work that could be done by volunteers, or over the years continually prefer one vendor over another because of perks – gifts, dinners, tickets – all things handed out in the name of marketing. Some – if you had the information – are easier to spot, the same contractor name popping up when they are the highest bidder of solicited quotes.

The problem is spotting these issues, which can be extremely difficult if the board has the same people on for a decade or more (not unheard of). Even the president of the United States has a term limit. No such thing with associations and corporations.

With today’s tools to communicate there should be higher transparency, more access to decisions, and better follow-through. It should almost be a legislative requirement that Twitter like feeds must be used by boards to communicate with their owners’ ongoing issues and solutions with their condo.

It is very clear that many boards act as a sort of Star Chamber and that will only lead to issues later on. I’m all for one on prosecuting these individuals and boards legally for infractions of by-laws and government legislation. With so many thousands of these quasi-legislative (and judicial) organizations, movement needs to be made now on opening communication.

In Canada Many Corporations Get Paid Before Banks and Taxes

Reading up on Condominium news from all over, this article in the New York Times talking about condominium corporations that vet purchasers caught my attention for numerous reasons.

Near the end of the first page is the comment:

In case of a default, the city is first in line to recover outstanding real estate taxes or other charges, followed by the mortgage lender. The condominium is third in line, and usually all it can do is file a lien against the property and hope that it will be repaid when the apartment is sold.

In Alberta, liens by the condominium corporation against a unit have first standing – that is above banks and taxes. There has been a very strong focus in Canada that the corporation should be given the powers to ensure the viability and upkeep of the common property. We have relatively lenient lien laws and the ability to foreclose and collect (it’s not simple, there is still a process, but it is a proven and supported process with case law). That has made the survivability of corporations much higher than in the US when owners default on paying contributions and special assessments.

This inability of the corporation to have the required standing and power to recoup outstanding HOA fees (in the US) seems to have triggered a very aggressive position by boards to keep out “possible deadbeats. “

… increasing number of condominium boards are hoping to weed out financially questionable buyers by requiring extensive application packages. Demands can include years’ worth of federal tax returns, detailed lists of all assets and liabilities, several letters of references, and even board interviews.

It’s not clear from the article if the corporations actually have the power to even ask for these documents or this process. They do have the power (which is not available in Canada as far as I know) to reject a purchaser if they (1) the corporation purchases the unit or (2) designate a different buyer at the same price. I get the feeling that it is from this right of changing the purchaser that they generate belief (which may be allowed legislatively) to challenge a person’s right to purchase in the corporation.

This ability to deny rights of purchase is highly concerning to me – and part of my concern is, I admit, not knowing the legislation. But what are the grounds that a corporation in NYC deny an owner – and do they even have to give a reason? Could we face a board that wants to keep a development all racially pure (whatever strain of race that is) and just buy the unit or appoint a new purchaser without reason? It is a concern that a condominium has the right to choose who can, and cannot, live in their building. In Canada, if you have the cash, and can abide by the by-laws (which can not filter on race, creed, or other human right) you can have the unit.

I once said that condominium are very very localized government. Could you imagine say a city that had the same right to deny purchasers to live in their city? That every resident had to provide financial stability documents before living there even if they can pay the price of the unit. How very unsettling.